Heart of the City Condominium Association

July 28, 2008 BIR RULING [DA-(C-016) 079-08] Sec. 32; DA 304-04 dated 6/2/04 Heart of the City Condominium Association 40 Sgt. Esguerra Ave. Quezon City Attention: Ms. Rhodora A. Sanchez President This refers to your letter dated May 20, 2008 requesting confirmation of your opinion that condominium dues collected from condominium unit owners and utility charges/billings reimbursed by the unit owners for the utility bills accruing to the individual units, at cost and without profit, do not form part of the taxable income of the Heart of the City Condominium Association, Inc. (HCCA). It is represented that HCCA was formed as a non-stock, non-profit corporation pursuant to Republic Act (R.A.) No. 4726, otherwise known as the Condominium Act; that under its Articles of Incorporation, the primary purpose of HCCA shall be limited to owning or holding title to the common areas in the Heart of the City Condominium Project and the management thereof; that any and all monies and assets of the HCCA shall be devoted exclusively to the furtherance of these purposes; and that no dividend of any kind or distribution of income shall be declared or made. It is also represented that pursuant to Article XV of the By-laws, HCCA may assess against each member such charges and expenses (or condominium dues) necessary and essential for the operation of HCCA including: 1. Regular assessments for operating expenses such as: a. All taxes and assessments due on the individual unit or units; aScIAC b. Expenses for maintenance and repair of any unit if such maintenance is necessary to protect the condominium or to safeguard its value and attractiveness; c. Cost of maintenance or repairs of the condominium whether located inside or outside the units, unless the expense is necessitated or caused by the act or negligence of a unit owner, tenant or occupant, in which case the expenses shall be chargeable to the owner or occupant of the unit; d. The cost of insurance policies insuring the condominium against loss by fire, earthquake and other casualty risks; e. Fees and/or salaries of managerial, legal, accounting, engineering and other professionals or technical personnel or entities employed or retained to assist in the management of the condominium; and f. All other expenses considered as common expenses including reasonable working capital for the day-to-day operations of HCCA or for a general operating reserve for replacement or to make up any deficiency or deficit in the common fund; and 2. Special and other assessments which shall be for the cost of repairs of common or limited common areas, tax assessments on real properties, insurance on the common and limited common areas. It is further represented that HCCA merely holds in trust the condominium dues collected from the unit owners which are used for administrative expenses, utilities and maintenance and repairs of the common areas for the benefit of said unit owners; that HCCA does not realize any gain or profit as a result of its receipt of condominium dues; additionally, HCCA also collects reimbursements from the unit owners for utility expenses ( e.g., water, electricity and other public utilities) paid by HCCA in behalf of said unit owners; that for instance, in the case of water and electricity, HCCA maintains a mother meter which indicates the total utility consumption to be paid by HCCA for a certain period; that using the individual meters maintained at each unit as basis, the utility charges paid are allocated to each unit based on actual consumption and later on reimbursed at cost. SEHaDI Finally, it is represented that, in effect, HCCA only advances the payment of the utility bills and then have the same reimbursed by the unit owners at cost and without any profit. In the light of the foregoing representations, you now seek a ruling on the following: 1. Condominium dues assessed and collected by HCCA from condominium owners, which are used for the expenses to operate and maintain the building and which no profit is realized as a result of receipt thereof, are not to be subject to the corporate income tax and expanded withholding tax. 2. The receipts of reimbursements from unit owners of utility charges ( e.g., water, electricity and other public utilities) are not subject to expanded withholding tax and the 12% VAT since HCCA does not sell, barter, exchange, nor lease any good or property nor does it render any service to the unit owners and the receipts are reimbursements only of costs paid by HCCA in behalf of the unit owners, hence, no profit is made therefrom. In reply, please be informed as follows: 1. Generally, income earned by domestic corporations is subject to the 35% regular corporate income tax. Nevertheless, collections being paid by unit owners for the maintenance of common areas of a condominium building are not subject to income tax since no income is generated therefrom. (BIR Ruling No. DA-126-00 dated February 24, 2000 and BIR Ruling DA 196-01 dated October 17, 2001). The receipts of condominium dues from the unit owners, which are merely held in trust and which are to be used solely for administrative expenses, utilities and maintenance of the common areas for the benefit of the said unit owners and from which HCCA could not realize any gain or profit, are not includible in HCCA's gross income. Hence, the same is not subject to income tax and consequently to the expanded withholding tax. (BIR Ruling No. 103-94 dated May 16, 1994; DA-470-98 dated November 3, 1998; BIR Ruling DA-008-00 dated January 5, 2000; and BIR Ruling DA-362-00 dated October 23, 2000) DAaHET 2. In reimbursement-at-cost transactions, expenses which are incurred by the advancing party for the benefit and for the account of the party accommodated, can be considered reimbursable expenses not forming part of gross receipts of the advancing party subject to tax. Since the party seeking reimbursement does not sell, barter, exchange, nor lease any good or property and neither does it render any service to the party accommodated, the reimbursement transactions are not subject to the 12% VAT (VAT Ruling No. 026-97 dated April 1, 1997). The mere collection of purely reimbursable costs billed, for instance, in the name of a client but collected through a broker or agent shall not be subject to the 12% VAT provided that such fact of reimbursement is clearly shown in the billing and/or official receipt (VAT Ruling No. 048-97 dated July 11, 1997). Being reimbursement of expenses without any mark-up or profit element (BIR Ruling No. 001-90 dated January 4, 1990), and not charges for services, they should not be considered as part of gross receipts for purposes of the expanded withholding tax. (BIR Ruling No. 129-92 dated April 20, 1992) In view of all the foregoing, this Office is of the considered opinion that receipts of mere reimbursement of cost with no mark-up or profit element of utility charges paid in behalf and for the account of the unit owners and not being charges for sale of goods or services, shall not form part of HCCA's gross income subject to the EWT and the 12% VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service